Governor of the Bank of Israel, Prof. Amir Yaron (Flash 90 photo)
The Bank of Israel published today the summary of the discussions of its monetary committee, which decided to raise the interest rate by 0.5% to 3.25% about two weeks ago. The summary of the discussion actually repeats the things we all know, but the conclusions of the monetary committee are the really important ones.
The monetary committee says that the Israeli economy continues to be strong and the labor market is tight. At the same time, we can see glimpses of the effects of the recent interest rate increases, mainly in the business credit sector of the banks. The Bank of Israel hopes that interest rate hikes by foreign banks, mainly in the US and Europe, will moderate the global economy so that in Israel we can maintain a high, but reasonable interest rate compared to the rest of the world.
More in-
The committee discussed the presence of the inflation rate in Israel above the upper limit of the target range. Inflation in the last 12 months rose to a rate of 5.1%. A high-resolution analysis of the consumer price index items indicates that price increases have permeated many items in the index, and that a significant portion of them is due to local demand factors.
The members of the committee noted that despite the increase in the inflation environment in recent months, it remains low relative to most economies in the world, and is in the vicinity of the bottom decile of the OECD countries. The expectations and forecasts for inflation for the coming year from the capital market are within the target and from the other sources in the vicinity of the upper limit of the target, the expectations from the capital market for the second year onwards are within the target range. The committee estimated that the processes of monetary tightening in Israel and the world and the moderation of the level of demand alongside the easing of supply chains and the drop in commodity prices are working to moderate inflation.
The committee discussed the activity data in the economy, which indicate a continued steady growth rate of activity, with a slight decrease in the end data. The GDP level in the economy continues to be higher than the pre-corona crisis trend line for the fourth quarter in a row. The members of the committee noted the growth in the third quarter which was positive, but lower than the level in the previous quarter, mainly due to a decrease in private consumption of sustainable products. In addition, the committee discussed the labor market, which has weakened slightly in the final data, but remains in a high environment that embodies a full employment environment.
According to the CBS trend survey, there is a decrease in the expectations of businesses to expand the number of people employed by them, with a significant decrease in the high-end industry and hotel industries. At the same time, the strength of the employee recruitment limit in recent months has decreased in most industries. Additional indicators of economic activity, including the export of goods (without UN and diamonds), the export of services, and the various import components, continue to remain in a higher environment than their level on the eve of the crisis.
The committee members also discussed developments in the exchange rate, its effect on inflation and its return to the target. Since the last policy decision, the shekel has strengthened against the dollar by 3% and in terms of the effective exchange rate by 0.7%, on the other hand, the shekel has weakened against the euro by 2.8%.
The committee discussed developments in the housing market. Apartment prices increased in the last 12 months at a rate of 19.8%, a significantly higher rate compared to the rate of recent years. Along with this, the members of the committee noted that other housing price indicators point to a moderation in the market: the number of transactions for the purchase of an apartment continues to decrease and the amount of mortgages taken out in October was greatly reduced and stood at NIS 6.1 billion (with a seasonal deduction of NIS 8.2 billion).
The members of the committee discussed the local capital market, where price increases were recorded in the stock indices, and long-term government bond yields and corporate bond spreads remained unchanged significantly, while the balance of negotiable debt decreased. There was a slight decrease in the balance of business credit from the banks, while interest rates continued to rise.
The monetary committee discussed the global activity that continues to moderate, and the continuation of the monetary tightening trend taken by central banks, including the FED and the ECB. The combination of the energy crisis in Europe and the war in Ukraine, the monetary tightening, and the slowdown in China, is expected to lead to a moderation in the pace of economic activity in the world. Accordingly, the investment houses have revised downward the global growth forecast for 2023. The purchasing managers’ indices of the developed and emerging economies indicate a slowdown in the pace of economic activity.
The inflation environment in the world continues to be high. However, in some countries, and in particular in the United States, moderation is evident. In most countries, the inflation indices are at a level significantly higher than the central banks’ targets and therefore, the worldwide monetary tightening continues, but some central banks are slowing down or signaling a more moderate pace in the future. Accordingly, the main stock indices in the world recorded Rate increases, and government bond yields remained significantly unchanged after trading in high volatility throughout the recent period.
At the end of the discussion, all six committee members believed that the interest rate should be raised by 0.5 percentage points to 3.25%. The members of the committee noted that the Israeli economy is registering robust economic activity, accompanied by a tight labor market while increasing the inflation environment. Therefore, the committee decided to continue the process of raising the interest rate. The rate of the interest rate increase will be determined according to the activity data and the development of inflation, in order to continue and support the achievement of the policy goals.
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